Irish economy expected to rebound on back of improving global trade and falling inflation

Ireland’s economy is expected “to rebound and grow” this year and next on the back of improving global trade, falling inflation and a strong labour market, according to the latest spring forecast from the European Commission.

In an upbeat assessment of the economic outlook here the European Union’s executive arm forecast Irish GDP (gross domestic product) would grow by 1.2 per cent this year and by 3.6 per cent next year. The forecast for 2025 represents an upgrade on the 3.2 per cent GDP projection included in its winter forecast.

“Easing inflation, a robust labour market and a recovery in real incomes are expected to support private consumption growth over the forecast horizon,” it said, noting that inflation would moderate to 1.9 per cent this year and to 1.8 per cent in 2025.

Modified domestic demand, which better reflects underlying domestic activity, is forecast to expand 1.7 per cent in 2024 and by 2.4 per cent in 2025.

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The commission noted that Ireland’s economy “weakened significantly” in 2023 with real GDP declining by 3.2 per cent primarily due “to the weak performance of specific multinational-dominated sectors”.

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A fall-off in multinational exports, particularly in the pharma sector, triggered a decline in GDP last year but modified domestic demand remained broadly positive.

“Pharmaceutical exports slowed down after the surge during the pandemic, and semiconductor exports also declined,” the commission said, noting 2023 also saw a fall in contract manufacturing where firms here contract third party entities abroad to produce goods on their behalf.

It said exports would grow again this year in line with improved global trade prospects.

[ Euro zone inflation to fall faster than expected, EU says ]

In its analysis the commission said consumer sentiment and retail sales data pointed to a modest pick-up in consumer demand in the first months of 2024. While headline inflation would continue to fall it said underlying price pressures would remain strong with “continued wage growth expected to sustain services inflation”. As a result underlying or core inflation, which excludes energy and food, would moderate only gradually.

The Irish labour market is predicted to remain strong but is showing “signs of moderation” with vacancy rates gradually decreasing, “indicating a softening of excess labour demand”. Headline unemployment is expected to stay low, averaging 4.4 per cent in 2024 and 2025.

On the public finances the commission forecast that the general government budget surplus would moderate marginally to 1.3 per cent of GDP this year as revenue growth softens and expenditure growth “remains brisk”.

For the euro zone as a whole the commission said inflation across the union would drop faster than previously expected this year as the impact of Red Sea trade disruption proves milder than expected.

It predicted annual inflation would drop to 2.5 per cent this year, before reaching the European Central Bank’s 2 per cent target in the second half of 2025. In its previous forecast in February the commission projected a more gradual decrease to 2.7 per cent in 2024 and 2.2 per cent next year.

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